Getting out of the debt trap

Look out for the telltale signs of a habitual defaulter... Is that you?

Just got a decent job and willing to spend? You are a potential credit card user. In no time, you will have an auto loan, and may be a personal loan, too, to service. So far, so good. The problem starts when your monthly credit is more than you can manage. And, you don’t realise when you are caught in a debt trap.

This is exactly what happened with Kolkata-based Debojyoti Basu when he took up a job in Mumbai. Three years ago, with three credit cards and two debit cards, the 30-year-old’s expenses knew no limits. His credit card bills were at least half his salary. As he was also using his debit cards, he could pay only half the outstanding. This became a habit and his bills kept increasing month after month.

 

Soon, banks started sending notices, and in no time, recovery agents became a part of his life. “One day, I cut two of my credit cards and sent them to the banks saying I hadn’t used these,” says Basu. No one bought the argument as Basu had not reported any such loss.

He went to the extremes — changing four apartments in three months to avoid bank agents. Also, he took a transfer back to Kolkata for a year. “But when I returned, the calls resumed. I was forced to pay when the bank threatened to report to the Credit Information Bureau,” says Basu. It took him two years to become debt-free.

Mounting debt is a problem for many. And, Basu is a classic case of what debt counsellors term as ‘a habitual defaulter’.

“Moving towards a debt trap is a slow process, which is why people do not realise when they are getting into one,” says a financial planner. For those in a dire situation, professional help is available, but a better option is to keep a check on yourself before it is too late.

Towards the debt trap
Once your debt payout exceeds your income and is delayed, it is time to step back.

 

If funds available are significantly lower than the outstanding debt, you know you are almost there. 
 

When you start borrowing from family and friends to pay debts, you are already trapped. 
 

You start avoiding calls from recovery agents and banks and get legal notices. 
 

In extreme cases, the person may start denying the reality of having gone financially overboard.

V N Kulkarni, chief counsellor, Abhay Counselling Centres, Bank of India, says, “Some clients insist they have issued cheques even when there is no money in their accounts just to get rid of the agents. They even allow auto debit through the electronic credit system.”

The way out
When overleveraged, start cleaning up your act to ensure the debt isn’t a drain on your take-home salary. Lessening the debt will increase your ability to raise more funds.

Curtail avoidable expenses. 
 

Look to generate additional income. 
 

Start building a contingency kitty alongside (at least three months’ salary) and buy life and health insurance policies 
 

Reschedule loans by increasing their term, while the equated monthly instalment (EMI) burden is reduced. 
 

Structure EMIs in a way that they follow your cash flow. 
 

Use low-interest fixed deposits or liquidate investments that are not very important

Sanjay Agarwal, senior vice-president and group head (retail strategy and branding), Arcil, says, “New loans should not be taken to repay loans unless they come at a lower cost or have an extended repayment term.” 

There are cheaper options like loan against property if the debt amount is very high, or a loan against life insurance policies. 
 

While paying loans, start with the most expensive ones — First, credit card loans, as they are the costliest (40 per cent interest a year), then personal loans (up to 25 per cent), car loans (up to 13 per cent) and home loans (average 10 per cent).

Madan Mohan, counsellor, Disha Financial Counselling Centre, advises, “Never resort to paying just the minimum amount mentioned in credit card bills, as it goes into paying only the interest on the outstanding and does not reduce the total amount. Similarly, don’t convert the bill into EMIs.”

To avoid such situations, save 20 per cent of your salary and do not let your debt payout exceed 50 per cent of the salary.